Reliance races towards billion-dollar Q3 profit

AS INDIA’S most valuable firm Reliance Industries (RIL) gets ready to announce its third quarter results on Thursday, analysts with leading Indian and international broking houses are keeping their fingers crossed. The petrochemical giant has, of late, developed a habit of surprising the analysts and also beating street expectations. The trend is likely to continue this time too. RIL is expected to post an over 25% increase in net profit, which is expected to touch Rs 4,000 crore ($1 billion), on a turnover of Rs 33,234 crore, according to ETIG estimates.
If we were to add the Rs 4,023 crore RIL gained from the sale of a 4% stake in Reliance Petroleum during the quarter, the PAT will zoom past Rs 8,000 crore (about $2 billion). The net profit is based on the assumption that RIL will post robust gross refining margins (GRMs) of over $15 per barrel during the December 2007 quarter. The rise in petrochemical prices and a modest increase in volumes will help the company post a substantial gain in turnover.
The improved performance will make RIL the second Indian corporate, after ONGC, and the first private sector company to cross the $1 billion mark in quarterly net profit. ONGC had posted a net profit of Rs 5,097.5 crore during the second quarter of 2007-08, the highest in Indian corporate history.
The October-December quarter witnessed strong growth in international refining margins, as prices of petro-products like petrol, diesel and naphtha rose faster than crude. The benchmark Singapore refining margins almost doubled during the quarter to around $8 per barrel compared with the corresponding quarter in 2006-07. Meanwhile, GRMs in the US weakened during the period. The US is a key market for RIL, which is able to supply low-sulphur fuel. During the same period, GRMs in Europe and Asia improved.
RIL’s profits are likely to be high, despite an expected weakening of petrochemicals margins. Globally, the petrochemicals business has witnessed pressure on margins, as feedstock prices soared faster compared with the downstream petrochemicals and polymers. However, RIL will not face significant adverse impact, since some of its petrochemical units use natural gas as feedstock. The erstwhile IPCL’s Gandhar and Nagothane petrochemical complexes and RIL’s Hazira petrochemicals complex are based on natural gas. Refining and petrochemicals contribute 98% of the company’s total revenues.
During the quarter, RIL’s Jamnagar refinery is likely to post around 5% fall in the volume of crude processed. This fall in production is likely to have a marginal negative impact on profits when compared with the corresponding previous quarter. The rupee’s appreciation, over the last one year, could also have a marginally negative effect on its financial performance.
On the Bombay Stock Exchange, the RIL scrip ended at Rs 3,098, down Rs 64, or 2%, over the previous day’s closing in a weak market.

FUEL FOR FIRE
RIL is expected to post an over 25% rise in net profit
The petro major’s net profit is likely to touch Rs 4,000 crore
The company's turnover is expected to be around Rs 33,234 crore

Sizzling crude prices to hurt oil retailers most

WHEN Indian oil companies post their Q3 numbers later this month, the biggest gainers would be those which are not involved in retail marketing of their products in India. These include public sector companies like Mangalore Refinery (MRPL), Chennai Petroleum (CPCL) and Bongaigaon Refinery (BRPL) as well as private sector ones like Reliance Industries (RIL) and Essar Oil. Exploration and production companies, too, will benefit from the higher crude oil prices, which a v e r a g e d above $90 per barrel during the quarter. The public sector marketing companies will end up as losers if oil bonds do not arrive in time to compensate their loss.

The growth in gross refining margins (GRMs) — the margin available to a refinery for processing a barrel of crude oil — was higher during the past quarter, which was driven by sharp rise in product prices. The prices of petro products such as petrol, diesel and naphtha have risen faster than crude oil. The benchmark Singapore refining margins have almost doubled in the quarter to around $8 compared to December 2006 quarter. This means a bonanza for domestic standalone r e f i n e r s such as RIL, M R P L , CPCL and BRPL as they get international prices for their final product. A part of their gains could be eroded by appreciation in rupee. In the private sector, refiners such as RIL and Essar Oil are likely to report strong bottomline growth during the December 2007 quarter, against the same quarter last year. Higher GRMs are likely to compen-sate the negative effect of around 5% fall in RIL’s refinery throughput. After spending several quarters making losses, Essar Oil could finally start reporting net profits on a consistent basis from December quarter onwards. Essar commissioned its refinery in December 2006 and is still operating below its rated capacity of 10.5 million tonne pa.

With the spurt in crude oil prices, the global crude oil producers are witnessing substantial growth in their profits. However, this doesn’t hold true for ONGC. The company is mandated by the government to share a part of under-recoveries suffered by downstream oil marketing companies by selling the crude oil at a discount. ONGC’s discounts are expected to cross $25 per barrel, while the appreciated rupee, too, will reduce company’s realisations. Despite these odds, ONGC is likely to put up a marginal growth in its profits when it publishes its results next week. Other crude oil producing companies such as Cairn India, Hindustan Oil Exploration (HOEC) and Selan Exploration, among others, will also benefit from the rising crude. Of these, HOEC is likely to report a fall in the production volume during the quarter. The spotlight is, however, likely to be on oil marketing companies (OMCs) Indian Oil, BPCL and HPCL, which will depend on issue of oil bonds for maintain-ing profits. The losses in their retail operations will be higher com-pared to the gains in their refining business. The group of ministers meeting on January 17 is likely to suggest measures to ease the pressure. Out of these, BPCL is likely to post around 10% growth in its refinery production, which will help its performance.